Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
When the government makes it harder to get a mortgage, you can bet the ranch that creative lenders will find workarounds.
That’s essentially what Equitable Bank did with its new Advance Mortgage. And home buyers will be hard-pressed to find a bank mortgage that affords more purchasing power than this one.
But is high-leverage financing sensible, given the risks ahead?
Let’s first look at why it even exists.
Regulatory clampdown
“When the 2018 mortgage stress-test changes were brought in, over $1-billion of our volume was no longer eligible under alternative mortgage guidelines,” Mahima Poddar, group head of personal banking at Equitable, said in a phone interview.
Those customers got pushed into the private lending market, Ms. Poddar said. And private mortgages have far higher interest rates, often exceeding 8 per cent to 10 per cent. “Some private lending fees are egregious.”
That’s bad for borrowers.
So is the fact that private lenders charge costly renewal fees. In fact, sometimes they refuse to renew borrowers altogether, despite the borrower paying as agreed. The Advance Mortgage has no renewal fees and virtually no renewal risk for customers in good standing.
In short, Equitable and other lenders adapted lending guidelines and funding sources to comply with federal regulations, while still allowing more buying power.
Flexibility at a price
Equitable Bank builds all kinds of flexibility into this mortgage.
For example, whereas big banks make you prove you can afford mortgage payments at the government’s artificially high “stress test” rate (currently 5.25 per cent to roughly 5.99 per cent), the Advance Mortgage only requires you to prove you can afford the actual mortgage rate. Its rates currently start at 4.89 per cent, or one percentage point above typical five-year fixed rates.
But that’s not all. Unlike banks, which limit your amortization to 30 years, Equitable lets you go to 40 years, which is somewhat rare.
And it doesn’t end there. Whereas big banks traditionally require that your debt load be no more than 44 per cent of your gross income, Equitable allows debt ratios up to 60 per cent.
This trifecta of flexibility results in a lot more home-buying power. And when I say a lot, I mean a ton.
Take an example of someone earning $100,000 a year, with a $200,000 down payment (20 per cent is the minimum) and paying $1,250 a month on other debts.
A typical bank would qualify them for a purchase price up to $536,000.
With the Advance Mortgage, they’d qualify for a whopping 53 per cent more – a purchase price as high as $823,000, or just enough to afford Canada’s average home.
And if you’re self-employed, Advance lets you prove income with far less hassle, mainly three months of personal/business bank statements. Most banks require at least two years’ worth of tax returns and notice of assessments.
You’re gonna pay
Lending latitude always comes with a price, and this is no exception.
Using the example above, the Advance Mortgage could cost you roughly $2,500 more in interest/fees than a bank mortgage in the first year alone, for every $100,000 borrowed.
Who would pay that?
Equitable targets the “highest quality of private lending borrower” with this product, Ms. Poddar says. That includes traditional alternative lending customers who fell out of this space because of the stress test.
Its typical customer is self-employed, including those who can’t prove income in a traditional manner. That said, Equitable does require provable income, strong credit and that the mortgage is for a high-quality urban property.
But is stretching like this smart?
If real estate prices are topping, as some claim, is now really the time to contort yourself into the biggest possible mortgage?
I wouldn’t do it. Maybe you wouldn’t either.
But far be it from anyone to pretend they know where home prices are going. It’s hard to lecture someone that they should rent for years on end, just so they can save up enough to get a low-cost traditional mortgage – especially if they’re a low default risk and will hold their property for years.
This product appeals to those who need a home now and don’t have a co-signor or other options.
Extra leverage, if you can truly afford it (be honest with yourself), gets you on the property ladder and off the renting treadmill. But leverage can also spell disaster if you overestimate your solvency and have no liquid resources to fall back on.
Limited availability
Equitable only sells the Advance Mortgage in British Columbia and Ontario at present. Other provinces are coming.
And if you’re wondering why a bank like Equitable can sell mortgages without imposing the federal stress test and your bank can’t, it’s because Equitable uses off-balance sheet funding from a non-OSFI regulated funder, Ms. Poddar said.
As for alternatives, another option is to choose a credit union that doesn’t use the federal stress test, if you qualify. The rates are about one percentage point less than Equitable’s Advance Mortgage, with no fees in many cases – but you won’t qualify for as much. Talk to a mortgage broker for suggestions.
Mortgage rates this week
Fixed rates surged another 10 to 25 basis points this past week, depending on lender and term. With quantitative tightening (QT) starting imminently at the Bank of Canada and Federal Reserve, and given March’s sure-to-be-hideous CPI reading, yields will likely shoot up further, lifting fixed rates again.
On the variable side, rates stayed put this week. But broker Ron Butler of Butler Mortgage pointed out something interesting: Consumers are starting to ask for the variable-rate mortgage (VRM) with the payment that doesn’t change, he said. People are shying away from adjustable-rate mortgages (ARMs) where the payment moves with prime, on the belief that the Bank of Canada is about to take rates to the moon.
By the way, one alternative to variables is a one-year fixed at 2.49 per cent. A few online mortgage brokers sell them. Mathematically, locking in for 12 months should prove a smarter play than a variable if rates shoot up 200 basis points in the next year, as the market expects.
Rates in the accompanying table are as of Wednesday, from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20-per-cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is editor of MortgageLogic.news and a contributing writer for The Globe and Mail. You can follow him on Twitter at @RobMcLister.
